Taxation in Puerto Rico: Income Tax and Property Tax for Expatriates Under Act 60

Published on May 2, 2026 and written by Cyril Jarnias

Moving to Puerto Rico is attracting a growing number of expatriates, particularly investors and high-income entrepreneurs. The island remains a U.S. territory, but it has its own tax system, distinct from that of the United States while being closely interconnected with it. For a foreigner or a U.S. citizen considering moving there, two topics quickly dominate discussions: income tax and property tax, especially within the highly publicized framework of Act 60.

A Unique Legal Framework: Puerto Rico Between Two Tax Worlds

Puerto Rico is an unincorporated territory of the United States, an island area with its own tax code (Código de Rentas Internas) and its own tax administration, the Departamento de Hacienda, often abbreviated as “Hacienda.” From the IRS perspective, Puerto Rico constitutes a separate tax jurisdiction, even though its inhabitants are U.S. citizens and pay social contributions (Social Security and Medicare) like on the mainland.

For expatriates, three blocks overlap:

– the Puerto Rico income tax system (progressive up to 33%, with complementary alternative minimum taxes);

– the Act 60 incentive regime for individual investors and export service companies;

– U.S. federal rules, particularly Sections 933 and 937 of the Internal Revenue Code (IRC), which define the exclusion of Puerto Rico source income for “bona fide residents.”

The entire challenge lies in understanding who is a resident, from which perspective, and where the different categories of income are sourced.

“Bona Fide” Resident: The Key to Income Tax

To benefit from the advantages of Act 60 and the income exclusion provided by IRC Section 933, one must become a “bona fide resident” of Puerto Rico. It is not just a matter of living there a few months a year: the concept is strictly defined by IRC Section 937 and associated regulations.

The Three Tests for “Bona Fide” Residency

An individual must simultaneously satisfy three tests to be considered a resident of Puerto Rico for the entire tax year:

– 1. Physical Presence Test The simplest option is to spend at least 183 days on the island during the year. Other variations exist, for example:

– at least 549 days over three years (current year + two previous years), with a minimum of 60 days per year;

– not exceeding 90 days of presence in the United States during the year;

– having limited U.S. source income (less than $3,000 USD) and spending more days in Puerto Rico than in the United States;

– or not maintaining any “significant connection” with the United States under federal rules.

2. Tax Home Test The tax home must be located in Puerto Rico for the entire year. In practice, the tax home corresponds to the main place of business, or, failing that, the regular place of abode. Having a fixed post in the United States or an effective primary residence in another country jeopardizes this test.

3. Closer Connection Test The administration then examines a series of factual criteria: location of the primary residence, family, personal assets, bank accounts, voter registration, driver’s license, social or professional affiliations, etc. The idea is to verify that the individual has a stronger connection with Puerto Rico than with the United States or any other country.

These criteria also combine with the definitions of internal Puerto Rico tax residency: local law presumes that a person physically present for at least 183 days in the territory during the year is a resident for Puerto Rico tax purposes, but local courts also consider the intention to settle there permanently.

Why This Status Changes Everything for Federal Income Tax

IRC Section 933 provides that bona fide residents of Puerto Rico can exclude from their U.S. federal taxable base all Puerto Rico source income – wages, interest, dividends, and capital gains – with one major exception: compensation paid as an employee of the U.S. federal government. Members of the armed forces or civilian federal employees remain taxable in the United States on such income, even if they reside in Puerto Rico.

A bona fide resident whose only income is Puerto Rico sourced generally does not have to file a 1040 return with the IRS. But if they receive wages, interest, or dividends from U.S. sources, or any other foreign income, they must report these amounts, without including local income excluded by Section 933. Furthermore, even without a 1040, an independent Puerto Rico resident must still file Form 1040-SS for the self-employment Social Security contribution.

Income Tax in Puerto Rico: Brackets, Surtaxes, and Options

Independent of Act 60, Puerto Rico taxes its residents on their worldwide income, as a sovereign state would. The system is inspired by the American model but with its own brackets, surtaxes, and alternative mechanisms.

Progressive Income Tax Brackets

The standard brackets for individuals are progressive up to 33%. A structure, cited for recent years, is as follows:

These brackets apply to ordinary income: wages, fees, business profits, taxable pensions, etc. Non-residents are only taxable on their Puerto Rico source income, often through withholding (20% for non-resident U.S. citizens, 29% for non-U.S. foreigners on certain income).

Alternative Minimum Tax and “Gradual Adjustment” Surtax

The system adds several layers:

– Alternate Basic Tax (ABT): a type of alternative minimum tax, with rates from 1% to 24% on adjusted income exceeding $25,000 USD. It does not apply if the only income is wages reported on a withholding statement.

For a high-income expatriate not covered by Act 60, these mechanisms can significantly increase the effective tax bill, despite a nominal bracket that may seem moderate.

Flat-Rate Taxation Option for Self-Employed Individuals

Self-employed professionals for whom at least 80% of income comes from services subject to withholding may opt for a flat-rate regime on gross revenue, instead of net income. The rates are as follows:

This regime simplifies tax management for certain consultants or service providers and guarantees a form of predictability, but it must be compared with taxation under the classic brackets after deducting all actual expenses.

Special Treatment of Investment Income

For ordinary residents (outside Act 60), several preferential rates apply:

Non-residents are subject to specific source withholding rates: 25% on certain long-term capital gains for non-U.S. foreigners, 15% for non-resident U.S. citizens, 15% on dividends. For expatriates using Puerto Rico as an investment platform, these structures must be weighed against the benefits of Act 60.

Act 60 for Individual Investors: 0% on Interest, Dividends, Capital Gains

The heart of Puerto Rico’s tax appeal for high-income expatriates remains the regime for individual investors, formerly Act 22 and now integrated into Chapter 2 of Act 60. It explicitly targets wealthy individuals who were not residents of Puerto Rico in the years prior to the regime’s inception.

Eligibility Conditions for Individual Investor Status

Several conditions are required to obtain an exemption decree:

– be or become a bona fide resident of Puerto Rico;

– not have been a resident of Puerto Rico for a specified period before the regime’s introduction (a ten-year period cited in initial texts);

– file an official application via the incentives portal (Incentives Portal or Single Business Portal);

– obtain an individual exemption decree, which has the force of a contract between the individual and the government and cannot be modified unilaterally;

– comply with several annual compliance obligations:

– purchase a primary residence in Puerto Rico within two years of establishing residency;

– actual use of this property as a primary residence;

– annual payment of local charitable donations (e.g., $10,000 USD, with a portion to organizations fighting child poverty);

– filing a compliance report with fees ($5,000 USD under the current framework).

Main Tax Advantage: 100% Exemption on Portfolio Income

The Act 60 regime for individual investors provides:

– 100% exemption from Puerto Rico tax on:

– interest received;

– dividends, regardless of source;

– short- and long-term capital gains on assets acquired after the residency date.

– For assets already held before moving to Puerto Rico, a separate treatment applies:

– if the capital gain corresponding to the pre-residency period is realized at least 10 years after establishment and before a deadline (e.g., January 1, 2036 in original texts), it may be taxed at a preferential rate of 5% in Puerto Rico;

– outside these conditions, the pre-residency capital gain is taxed under the ordinary Puerto Rico bracket.

Gain Sourcing: Pre-Residency vs. Post-Residency

U.S. taxation adds a layer: regulation §1.937-2(f) establishes a “ten-year look-back” rule for investment capital gains. A U.S. citizen who sells securities acquired before moving to Puerto Rico cannot automatically consider the entire capital gain as Puerto Rico source. By default, the pre-residency portion remains U.S. source and thus taxable in the United States, even if Puerto Rico applies its own rate.

Increased Exposure to Tax Audits

Facing the success of Act 22/60, the IRS opened an audit campaign in 2021 targeting U.S. taxpayers who moved to Puerto Rico and benefited from these regimes. The initial audit letters include several dozen questions, with over twenty focusing on the reality of bona fide residency. By mid-2024, the IRS had already audited dozens of taxpayers and sought cumulative amounts of several million dollars.

Concurrently, some U.S. states (New York, California, New Jersey) conduct their own residency audits. One report indicated that about 30% of Act 22 beneficiaries came from these high-tax states. New York performed about 15,000 residency audits between 2013 and 2017, collecting over $1 billion, and California collected over $80 million in 2023 on similar cases.

For an expatriate, meticulously documenting days of presence, severing ties with the former state of residence (home, driver’s license, voter registration), and establishing a long-term presence in Puerto Rico is therefore crucial.

Act 60 for Businesses: 4% Tax, Exempt Dividends, Largely Tax-Free Property

Act 60 is not just for individuals: its chapter on export services (successor to Act 20) creates a very favorable tax environment for companies based in Puerto Rico that invoice clients located outside the island.

Corporate Tax Rates and Dividends

A qualified export service company generally benefits from:

– a corporate income tax rate of 4% on the net income from exempt activities;

– for small structures (revenue ≤ $3 million USD), a rate of 2% for five years, then 4%;

– possibly 1% for innovative pioneering activities;

– a 100% exemption on dividends and profit distributions to shareholders resident in Puerto Rico.

Exemptions on Property Tax and Municipal Taxes

On the property side, companies benefiting from Act 60 also obtain substantial reductions in property tax (contribución sobre la propiedad) and municipal taxes:

– for large companies (revenue > $3 million USD):

– 75% exemption on property tax (real and business personal property);

– 50% exemption on the municipal license tax (gross receipts tax).

– for smaller ones:

– 100% property tax exemption for the first five years, then 75% thereafter;

– 100% waiver on the license tax for five years, then reduction to 50%.

These reliefs apply to property used in the exempt activity (offices, warehouses, machinery), not the executive’s personal villa, which remains subject to the general property tax regime.

Property Tax in Puerto Rico: Mechanics, Rates, and Exemptions

For any expatriate owning real estate in Puerto Rico, property tax is an unavoidable reality. It is administered by the CRIM (Centro de Recaudación de Ingresos Municipales), the central agency that manages the 78 municipalities.

How Property Tax is Calculated

Puerto Rican property tax is based on a historical “cadastral” value, very different from the current market value. The system uses a 1957 methodology and tables, with an assessment coefficient of approximately 11.83%.

In other words, the taxable value of a property corresponds to about 11.83% of its estimated market value. This base is then multiplied by a millage rate set by each municipality within a legal framework, generally between 8.03 and 12.33 per thousand (i.e., 0.803% to 1.233% of the taxable base).

Schematically:

> Annual Property Tax ≈ Market Value × 11.83% × millage rate / 1,000

An example helps visualize:

The resulting effective average property tax rate in Puerto Rico is thus around 0.39% of market value, significantly less than the U.S. average (approximately 1.07%), which reinforces the island’s real estate appeal.

Role of CRIM, Deadlines, and Penalties

CRIM generally issues an annual bill, payable in two installments. Texts mention different date schemes (July 1 and January 1, or September 1 and March 1), but, in practice, taxpayers must refer to the assessment notice and indicated dates.

Payments can be made:

– online via the CRIM portal;

– by phone;

– at a CRIM office;

– via certain banks (e.g., Banco Popular), sometimes with the possibility of benefiting from discounts for early payment.

In case of late payment:

Specificity: Tax on Business Personal Property

Alongside real estate tax, a tax applies to personal property used in a business activity: inventory, equipment, office furniture, machinery, software, etc. It applies to businesses and self-employed individuals operating a trade in Puerto Rico.

– the tax base relies on net book value or, failing that, a minimum residual value;

– the maximum rate is around 9.83%, varying by municipality;

– a specific return must be filed before May 15, and if the amount exceeds $1,000 USD, payment is made in four installments (August, November, February, May);

– reductions are possible for full early payment (e.g., a 5% discount).

Severe penalties, up to 25% for late filing, apply. Significant businesses (several million in revenue) must have these returns certified by a licensed CPA in Puerto Rico.

Exemptions and Reductions: Homestead, Seniors, Act 60

For resident expatriates, several mechanisms allow easing the property tax bill, especially on the primary residence.

Primary Residence Exemption (“Homestead Exemption”)

The primary residence benefits from a reduction of the taxable base of about $15,000 USD of assessed value. This exemption applies to only one property per taxpayer, generally limited to a plot of about one cuerda (slightly less than an acre).

Other Targeted Exemptions

In addition to the homestead:

– additional exemptions exist for owners aged 65 and over, depending on income and municipality;

– specific reductions are granted to veterans, persons with disabilities, and certain entities (religious associations, hospitals, charitable organizations);

– agricultural exemptions apply to certain land and equipment.

Interaction with Act 60 for Business Property

Real or personal property used in an Act 60 eligible activity (export services, financial entities, tourism, industry, private equity funds) can benefit from a 75% property tax exemption, or even 100% during the first years for small businesses.

A summary table illustrates these benefits:

These provisions concern business assets. The expatriate’s personal home benefits from these reductions only through the classic regimes (homestead, seniors, etc.), not as an Act 60 asset.

Articulation with U.S. Federal Tax and Filing Obligations

For a U.S. citizen expatriated to Puerto Rico, it would be dangerous to consider the island as a classic “offshore tax haven.” From a federal perspective, Puerto Rico is not a foreign country under the rules for foreign earned income exclusion or FBAR obligations.

Exclusion of Puerto Rico Source Income (IRC Section 933)

A bona fide resident can exclude their Puerto Rico source income from their federal taxable income, but:

Federal government employee wages remain prima facie taxable at the federal level, even for a Puerto Rico resident. In return, the tax paid to Puerto Rico on these wages may qualify for a federal tax credit.

Incompatibility with the Foreign Earned Income Exclusion

The famous Foreign Earned Income Exclusion (FEIE), which allows an expatriate in France or Singapore to exclude up to $126,500 USD of wages in 2024, generally does not apply to income from Puerto Rico, since the island is not considered a “foreign country.” Expatriates based in Puerto Rico therefore cannot stack FEIE and Section 933 exclusion for the same income.

FATCA and FBAR Obligations

Another specificity: for foreign bank account regulations (FBAR) and FATCA:

– Puerto Rico is not considered a foreign country. Bank accounts opened on the island therefore do not trigger FBAR filing (FinCEN Form 114);

– however, a Puerto Rico resident remains a U.S. citizen in the eyes of the tax authorities, subject to FATCA for accounts outside the United States and its territories, if they exceed the foreign financial asset thresholds (e.g., $200,000 USD year-end balance for a single individual residing abroad).

These subtleties explain why using specialized firms like Caplin & Drysdale, Golding & Golding, or Kevane Grant Thornton is common among Act 60 beneficiaries.

Strategies and Pitfalls for Expatriates: Income, Real Estate, Dual Residency

For an expatriate considering Puerto Rico, the question is not just “How much will I pay?” but especially “Where and on what basis will I be taxed?”.

Business and Investment Income

An entrepreneur or investor who structures correctly their activity can combine:

– 4% tax on the profits of their export service company based in Puerto Rico;

– 0% Puerto Rico tax on dividends received from this company if they are a resident and holder of an Act 60 decree;

– 0% on personal interest and dividends;

– 0% on capital gains realized after arrival, subject to respecting sourcing and timing rules for pre-existing assets.

Real Estate and Property Tax

On the real estate side, the expatriate benefits from a relatively low property tax as a percentage of market value, especially since part of the value is often undervalued due to the 1957 base. Obtaining the homestead exemption on the primary residence and, where applicable, the senior or veteran exemption, further reduces the impact.

Residency Conflicts with U.S. States

A point often underestimated by U.S. expatriates is the persistence of ties with the state of origin. Having kept a house, left a driver’s license active, enrolled children in school, or continued to vote in the former state can be enough to trigger a residency audit. And even if the IRS recognizes residency in Puerto Rico, a state like New York or California may continue to claim tax on the taxpayer’s worldwide income as a “statutory resident” or “domiciled” individual.

Many Act 60 beneficiaries protect themselves by first transferring their legal domicile to a no-income-tax state (Florida, Texas, Nevada), before settling in Puerto Rico, and then systematically severing tax ties with their state of origin (license, voting, addresses, professional licenses).

Conclusion: A Powerful Tax Engineering, But Under Close Scrutiny

Puerto Rico offers expatriates a rare cocktail: belonging to the U.S. legal and monetary system (dollar, bank supervision by the New York Fed and FDIC, application of U.S. intellectual property law), combined with a very favorable autonomous tax regime, especially under Act 60.

For property tax, the assessment at 11.83% of market value and moderate millage rates result in amounts lower than those observed in many U.S. states, especially when adding primary residence exemptions and, for businesses, reductions up to 75% offered by Act 60.

For an expatriate, Puerto Rico can be an extremely powerful planning lever, provided they accept actually living on the island, building a substantial personal and economic presence, and regularly having their tax structure audited by specialists proficient in both Puerto Rican law and U.S. federal tax law. It is at this price that income tax and property tax in Puerto Rico become a strategic asset rather than a latent risk.

Cyril Jarnias

Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.

On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.

Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.

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